FASB simplifies revenue rules for franchises

The Financial Accounting Standards Board released an accounting standards update Thursday, giving franchisors a practical expedient way to determine their performance obligations under a franchise agreement.

The update addresses some of the concerns of private franchise businesses about the complicated revenue recognition rules. When a franchisee opens a new branch of a franchise, the franchise agreement generally stipulates that the franchisor will support some of their pre-opening activities to support the new branch. Those activities could include services such as training or site selection. The practical expedient allows certain pre-opening services to be accounted for as distinct from the franchise license.

FASB has been working to simplify many of its standards for private companies, in consultation with its sister organization, the Private Company Council. Last September, it issued a proposed accounting standards update to offer franchise businesses a practical expedient to its complicated revenue recognition rules (see story). The International Franchise Association has been pushing FASB for changes to the revenue recognition rules and succeeded in winning a delay of the standard earlier last year for private franchises as part of a larger deferral of various accounting standards in response to the COVID-19 pandemic (see story).

Courtesy of GASB

FASB acknowledged that it decided to undertake the project to address the issues raised by stakeholders who expressed concerns about the level of effort required to account for pre-opening services by private company franchisors when trying to comply with the 2014 revenue recognition standard, also known as Topic 606.

“The board also became concerned that some entities that are not public business entities presumed that the pre-opening services would not be distinct from the franchise license and that the initial franchise fee would always be recognized over the license term rather than applying the Topic 606 model to identify performance obligations,” said FASB.